JP Morgan’s investible index business is on a tear. Last year, issuance of structured notes and index-linked certificates of deposit was up significantly on 2015, the bank says, and it launched more than 300 indexes designed for retail and institutional clients.
“2016 was a record year in terms of flows into our products, and 2017 is shaping up to be even better,” says Brandon Igyarto, a New York-based managing director at the bank.
The business was supported on the retail side by the strong performance of its Mozaic (USD) multi-asset index, which – via its licensing to Nationwide for the US financial services giant’s fixed indexed annuity product – was last year’s deal of the year in the Structured Products Americas Awards. The index offers exposure to 12 equity, fixed-income and commodity markets, with monthly rebalancing based on positive momentum and a volatility-smoothing feature.
“Performance of Mozaic was strong in 2016. It’s a 4–5% volatility index that delivered 10.07% last year,” says Igyarto, noting that figure is considerably higher than the 5–7% return that is typical for the level of risk taken. The product has, in some ways, become a victim of its own success, he adds.
“With any index, there are always theoretical limits to capacity. Inevitably, you’ll begin to affect the performance of some of the underlying components,” he says. “Before we reached that point, we sought to make changes to alleviate that potential future pressure.”
But rather than simply make the minimum changes to remove possible pinch-points, Igyarto’s team undertook a more fundamental review: “We worked for nine months with Nationwide and their distribution partners at Annexus to come with an ‘evolutionary’ version of Mozaic.”
The changes in Mozaic II involve increasing the number of available sub-indexes from 12 to 15, and removing the requirement to select components of the index based strictly on positive momentum.
Spending time, resources and money on the back end allows us to really listen to clients and other thought leaders, and bring different types of index to the marketBrandon Igyarto, JP Morgan
“One of the lessons of 2015 was [that] when you enter into choppy markets… you might miss a bounce-back. The empirical analysis showed that if you remained invested through the cycle, you did better,” says Igyarto.
Meanwhile, the institutional business has been turbo-charged by investments in its technology and its distribution platform. These investments have enabled JP Morgan to quickly and efficiently generate customised products.
Asuka Nakamura, vice-president in JP Morgan’s Americas cross-asset structuring team, says: “A lot of the business we do on the institutional side isn’t necessarily on our off-the-shelf product, but is rather on our off-the-shelf concepts that are modified and customised to client needs.”
Igyarto adds: “In some cases, we can give customers the ability to determine how they want to weight, how they want to filter [and] define their asset mix – that has allowed us to deliver a better and broader offering.”
To achieve that, he says, the bank has made significant investments in its structuring business, both behind the scenes in terms of the tools needed to compute and analyse new indexes, and in terms of front-end deliverables.
“The most tangible investment has been in the legal infrastructure that allows us to create modular-based index documents,” says Igyarto. “We spent the time and money to build a top-line document that governs balanced indexes generally, which has saved us both money and time.”
With more than 300 indexes rolled out last year, there is no shortage of examples to choose from. Igyarto cites the JP Morgan Balanced Value Dividends Index, the latest in a family of balanced indexes that offers combined exposure to various types of stock and bond sub-indexes. In this case, the bank worked with Wheaton, Illinois-based investment advisers and structured product wholesaler First Trust to pair equity and bond products of its choice.
“This framework, where we can modularly put in stock and bond products, allows us to go to clients and say: ‘Tell us what you want to be talking about; what themes you’re interested in’,” he says.
The platform also allows JP Morgan to take chances on new products that provide access to innovative indexes, such as is the JP Morgan iSentium Sentiment Index. This uses algorithms developed by Florida-based ‘big data’ company iSentium, which crunches social media content to identify predictive indicators of changes to market prices.
“Because of the groundwork we’ve laid over a number of years, whether in terms of investments in technology, time spent on legal, the computational standardisation we’ve effected, it allows us to entertain concepts that previously would have been out of reach,” Igyarto says.
“If every index represented a massive undertaking, we couldn’t do some of the cutting edge things we’ve developed,” he adds. “Spending time, resources and money on the back end allows us to really listen to clients and other thought leaders, and bring different types of index to the market.”
The week on Risk.net, April 7–13, 2018Receive this by email